Funds Global – What are your expectations for the growth of China’s ETF market (which stands at just over $155 billion), given that overseas investors can now directly access the mainland market via the Hong Kong Connect programme?
The growth has been phenomenal, and the China stock ETF grew by 40%. You have also seen a lot of thematic products emerge recently. The HK-China ETF Master Feeder Scheme between the mainland and Hong Kong could be a good opportunity for investors to leverage that channel. At this moment, we have seen only a few such ETFs there, but as a market infrastructure, we have made Hong Kong-domiciled ETFs available on our platform and our financial intermediaries have access. At present, we don’t see a lot of products on the HK-China ETF master feeder scheme, but if the offering could expand – given ETFs are increasing in China – then they would be attractive to investors outside China.
China’s growth is very promising, and a lot of the demand growth is driven domestically. Between the mainland and Hong Kong, or between Hong Kong and Japan where they have established this cross-listing scheme, last year we saw a couple of ETFs being adopted with this cross-listing scheme, and if the requirement can be widened or broadened, we would expect more participants from other jurisdictions to take a closer look at that.
While many people know that China is the second-largest global economy, few people know the China A-share market is also the second-largest and accounts for almost 10% of the entire world. But China is structurally underweighted in global indices like FTSE or MSCI, so if they continue to increase the inclusion factor, China would be an important market and it’s boosted by its low correlation with the rest of the world.
The cross-listed ETF is a good start, but there has been talk about an ETF Connect for a long time and that would be helpful to the market in general, because the onshore investor can access through the ETF listing in Hong Kong for global exposures and vice versa – global investors can access Hong Kong-listed ETFs through the ETF Connect to China for their onshore Asia exposure as well as the money market exposures. The money market ETFs in China offer much higher yield compared to deposits. Chasing yield is what most of the European and US investors are currently looking for. The Chinese government bond offered around 3% yield versus the almost negative yields for European treasuries. If the market keeps developing, especially the ETF Connect, that would be extremely helpful for the ETF market in this region.
The index providers need to keep up with the work. MSCI started to include China equities in their broader indices in 2018 – it’s shy of three years ago. It’s the second-largest economy, but it was not in the broader indices less than three years ago. It only started to get included into the fixed income indices last year: JP Morgan completed including Chinese government bonds into their indices, Bloomberg also completed and FTSE announced details to be announced this year, so you can imagine they are still trading China as a new asset class to their index inclusion.
For the parts that get included, China is a big portion of MSCI emerging markets at the end of their full inclusion, but again, they still stood at less than 10%. MSCI World today is 60%-plus the US, and the second-largest economy of China is less than a few percentages, so those have got to be rebalanced and you can imagine the inflows that would be triggered as a result of the benchmark or rebalancing to reflect the economic importance for each of the countries.
International investors outside of China are recognising that China is an important asset class to own in their portfolio, but also that they are still underweight there. The reasons are they are getting to know the market in equities and fixed income and the effort to educate international investors on China’s capital market is still ongoing.
Onshore managers doing the heavy lifting in terms of teaching and telling their counterparts outside of China and educating them about China’s capital market is key. With regards to Connect flexibilities, we’re doing that, but we’ve got to do it quicker when it comes to broadening the programme and not restricting what asset class or shares are listed on – making that reform quickly will help China to be increased as an asset class in clients’ portfolios.
I completely agree on the evolution of China increasing in the indices. You’ve got to provide solutions for people to be able to keep up with that change and even though it’s starting to come into the indices, generally there are not very many clients out there who aren’t underweight in China equities and fixed income, as well as being underexposed to renminbi and that’s a trend that’s going to change.
You also can’t underestimate the huge potential of the retail market in China. We talk a lot about how people access China, but the retail market can be super-powerful, and that’s one of the markets you really need to tap into, because you’re going to see an explosion of those assets in the local market.
I came to Hong Kong at the beginning of 2015 and we were talking about Stock Connect then, and in 2021, we’re still talking about it. The moves have to be quicker on this. There will be hurdles, but it just needs to move quicker to be able to keep up with where the market’s going and how important China is becoming. It would have been much better for the economy globally if we had managed to sort out the ability to be able to trade from one jurisdiction to another in a seamless way without there being too many restrictions.
It would also be good to enlarge the scope of the HK-China ETF master-feeder scheme because at the moment, it’s quite limited. Sometimes it’s merely Hong Kong ETFs, so it would be great if we could include Hong Kong master feeders which are connected to Ucits, and also to allow Ucits ETFs registered in Hong Kong with the Securities and Futures Commission (SFC). Having more products will increase activity between the two trading territories.
What could also be quite interesting in the region is the development of the Greater Bay Area’s (GBA) Wealth Management Connect. Again, it’s an opportunity to position mutual funds and ETFs in that region through banks. It is a small region in comparison to mainland China, but it could be a good opportunity to start distributing products there. Although phase one is limited to certain mainstream products, for phase two, it would be great if we could include more Ucits products in China.
I’ve been in this market for many years and it has been amazing to see how the ETF market in mainland China developed so naturally over the past few years. We have definitely seen more institutional players in the market and also how investors embraced the China-related investment. Further opening-up of the market would benefit the investors in this region to have more choices when it comes to their investment.